Thursday, December 18, 2008

Lost For Words

People who are acquainted with Macro Man, either personally or virtually, will know that he is very rarely lost for words. This morning, however, he has reached that milestone, as he's watched prices flicker on his screen in slack-jawed silence.

Policymakers often reference a desire to avoid "excessive volatility" and the proper functioning of markets. Suffice to say that that we are now firmly in the presence of the former, with an utter absence of the latter. Regardless of your market view, right or wrong, you want to have a market in which to transact. The past couple of weeks, and the past couple of days in particular, has seen complete implosion of the market's ability to reflect transaction flows and fundamentals.

This morning, for example, the German ifo survey printed a lower-than-expected 82.6, it's worst reading since...err...ever. Regardless of what you think about the dollar, it would seem to be an excessive response for EUR/USD to rally 3 big figures in the ensuing hour.

Indeed, while the dollar has been the object of focus, this has probably been more of a euro mvoe this month than a dollar move. Indeed, the dollar has barely budged against the GBP this month. The chart of EUR/GBP is truly awesome, in the sense of awe-inspiring. Meanwhile, in a related note, Parliament has officially changed the name of the GBP to the Great Britain Peso.
Remarkable, given that the Noughties have been the "Decade of Dollar Decline", sterling is now weaker on a real effective exchange rate (REER) basis than the buck. As recently as July, sterling's REER had outperformed the dollar this decade by 20%.
That the euro has gone uber-bid against no5t only the dollar and sterling, but also Eastern Europe and the Scandis offers some suggestion that this month's fireworks are less of a dollar move than a euro move. Just what the world's largest exporter needs, especially as ancillary evidence of collapsing trade volumes continues to mount!

Indeed, as of this morning's trade, the euro's REER has probably reached a post-Bretton Woods high. Normally, this, combined with a swift return of European inflation back to target, might suggest to the ECB that there is perhaps a bit more room to open the monetary taps. Then again, given that ECB board member Juergen Stark is already talking about the need to revert to a restrictive stance....perhaps not.

Maybe the market would be somewhat less disjointed if chaps like Herr Stark were lost for words a bit more often....


jez said...

Well its a carry trade isnt it?
I mean - banks can borrow money for free from the Fed and put it into higher interest rates further out on the yield curve.
Question is what does that trade look like when the eurozone banks look more of a risk and/or reduce their rates.

Anonymous said...


Is it possible that this is repeat of the summer episode for the ECB, where once again they are talking up interest rates relative to rest of the G7...but will eventually have succumb to the slow economic circumstances. Lack of any substantial fiscal plan for the EZ economies, are growth differentials really that skewed in the favor of euro?
this is an euro move and its visible in eur/cad/ eur/ gbp, etc etc.

Anonymous said...

MacroMan, your comments on the dollar are (as always) interesting, but today they don't reach a conclusion.

If you had to hold assets in either dollars or euros, right now: which would you choose?


john e walker

Anonymous said...

Roubini wrote somewhere in September that cuts in the Fed Funds rate could lead to dollar depreciation. Apparently all countries that cut their rates recently see their currencies depreciate (not the euro that moves as it stays stable against currencies of countries that didn't move their rates and have an ugly outlook, like Hungary).
The TED spread narrowed 3,35 %. The combination could signal an asset inflation start ... what the FED wanted after all.

Mr. Simple Sense said...

The silence is deafening—and while the FT had the dollar decline on its front page the same can not be said of the WSJ or NYT. Where is Paulson saying we believe in a strong dollar –well he sure as shit can’t say that now cause you can’t support a strong USD while your buddy Ben is running the printing press as fast as he can. But the really amazing thing is where is Sarkozy—he must either be on vacation or in Gitmo with a ball gag in his mouth cause the appreciation of the EUR is costing the French jobs. Or maybe, just maybe the tin hat gang is really working on this thing together (can’t believe it but anything is possible). Figure the US lead the world into this mess let em lead us out. Europe and Japan agree to take it on the chin for 6 months –let the US devalue their debts, get their credit market going again and start growing again and then spending on imports. Truth be told I am not sure what the ROW can do to stop the dollar depreciation. Intervention directly against interest rate policy and QE is pointless, and while trade barriers are always a possibility I doubt that anyone wants to be seen reading directly from the depression playbook. Maybe this works out fine—so long as the depreciation doesn’t get totally out of hand and every SWF and foreign CB decides to exit their usd position. But make no mistake about it, the EUR strength is related to an attack on the dollar’s reserve status IFO be dammed. Who would have thought the attack would be lead by the head of the Fed.

Anonymous said...

TY printing 128-12 now buh buh buh bad, bad to the bone!

euro and gold went up for the 11 straight sessions, performance anxiety in uber thin conditions

gold bugs really hammering on the ‘comex default’ every day in a big way(last day possible default 12/29)..
putin acting real bad again, i.e. ‘anybody who criticizes the state is a traitor’, which supports gold

the ted_despread down to 1.51 and 3 month libor_ois down to 1.31 seem to show the fed effect is nicely helping thus far

Anonymous said...

gold - a layup trade

fiat war ends with gold higher

Anonymous said...

I hear lots of Chinese banks are buying the Euro right now. It's the battle of the reserve currencies. The shift of trust away from the dollar is happening and as pointed out by Mr S.S. it was triggered by the Fed.

Macro Man said...

Yes, a story is now circulating the Voldemort (ie, SAFE) has bought 60 bio EUR/USD over the past week or so, though evidently he is now done.

Not sure if it is true or not, but if so it represent an unbelievably flagrant violation in best practice, and is so irresponsible for a sovereign authority that I'd suggest that it borders on an act of economic warfare.

Given that governments seem to be involved with every other aspect of finance, it would be nice if the US, Europe, UK et al told the Chinese to eff right off...and if they don't, then hey presto, there's an immediate 100 pct tariff on all chinese goods.

Oh, you want to sell your Treasuries held in custody? So sorry, your account is frozen.

Or maybe the authorities can just tell all the banks in which the government owns a stake not to quite FX to the Chinese.

Really, if this is true, it really does beggar belief.

Anonymous said...

"Meanwhile, in a related note, Parliament has officially changed the name of the GBP to the Great Britain Peso."

no no no, its the Gordon Brown Peso!

Macro Man said...

Anon...bravo! I can't believe I didn't think of that!

A Reader said...

Dear Mr. Macro:

I've been reading your posts since the start of the dreaded Crisis. Even though I usually get lost right after the first paragraph, I still appreciate your articles. Have a happy holiday. Thanks.

Anonymous said...

why would paulson be mad on the chinks? what best practice? it plays right to his game. wonder how much EU can hold under these conditions though.

Anonymous said...

MM, not sure why you are so mad. Maybe EUD is a better reserve currency since ECB seems to be more disciplined than Fed. Central banks need competition too.

Macro Man said...

I am angry because the when it comes to the currency market the Chinese are like locusts- disgusting parasites who descend and raze everything in their wake.

Regardless of the relative merits of the Fed and the ECB, the middle of December in the worst year of market liquidity in modern history is NOT the time for the monetary authority of a sovereign nation to begin playing around with the currencies of two other foreign sovereign nations/economies like an orca plays with a baby seal.

Anonymous said...

macro man --

voldemort was wrecking havoc on the agency market by not buying in sept and oct and nov ... and after buying $60b of treasuries in oct (and probably something like $200b over the 3ms), maybe voldemort got full --

or perhaps voldemort realized that if it didn't like USD strength it should sell.

I have heard a similar rumor that safe had resumed buying, but hadn't seen your number on scale. care to guess if the number is right?


Anonymous said...

the middle of December in the worst year of market liquidity in modern history is NOT the time for the monetary authority of a sovereign nation to begin playing around with the currencies of two other foreign sovereign nations/economies like an orca plays with a baby seal.

If you're the orca, what's the problem?

There's no question the Chinese authorities see this exactly as war. And why not? They're winning.

They have successfully destroyed the industrial capacity of the U.S.

Continental Europe is the next: the Death star has cleared the planet.

Certinaly in the USA there are eternal apologists for such behavior---or more correctly avoiding any retaliation based on short term pain---so there is nothing for them to lose.

Europe will soon be in the same state, except the secret ally will be proper German recititude instead of the tendentious right-wing freemarketism.

Steve said...

Does Voldemort really have enough dough to sell dollars AND buy treasuries? Or will that be the next shoe to drop? Hmmmm...

Macro Man said...

Brad, I can't believe it was €60 billion in a week.....but it was surely a helluva lot, especially relative to the available liquidity, executed in an unfriendly manner.

Anon @ 9.40, well, yeah. If you're a bully, you are going to push people around until someone stands up to you. And as you say, to date the West has sat on their hands, allowed China to claim an unfair advantage, and help eviscerate the US (and soon to be European?) manufacturing sectors.

Very few people have publicly called them out for it; Brad has certainly done his bit over the years to shine a light on the scale of China's activities, and I'd like to think that I have made some small contribution towards bringing their market impact into the public domain.

Steve, they have a stock of $2 trillion worth of reserves and are still accruing tens of billions of dollars a month. They've got plenty of dough to do both.

Anonymous said...

China will take the long view on the bully position IMO. The West has played in Asia from a position of strength for hundreds of years so why shouldn't China do the same to the West now that they can?

To throw in a gratuitous Buffy quote: You won. All right? You came in and you killed them and you took their land. That's what conquering nations do. It's what Caesar did, and he's not goin' around saying, "I came, I conquered, I felt really bad about it." The history of the world is not people making friends. You had better weapons, and you massacred them. End of story.

In this case China has the weapons and what is really holding them back?

Anonymous said...

Very few people have publicly called them out for it; Brad has certainly done his bit over the years to shine a light on the scale of China's activities, and I'd like to think that I have made some small contribution towards bringing their market impact into the public domain.

Plenty of people have "called them out" for it, but they're dismissed as protectionist anti-business leftists and union thugs.

And, as if "calling them out" is going to make any difference. Witness political freedom 1989-2009.

Actually doing something about it makes a difference, and any proposals are likewise screamed at by all the Powers as protectionist nonsense, smoot-hawley depression baiters, and the advocates superciliously told to "look up Ricardian competitive advantage, moron".


My answer is 'look up Nash equilibrium'. We are in an game theory equilibrium where either party moves makes them worse off (temporariliy) but is far from the global optimum in utility (and one party benefits much more).

ownlee1 said...

anon @ 11:47 PM:

the reserves ARE their weapons amigo.

and the west handed them right to them with smiles & handshakes.

you too (look where your computer's made for instance).

when one realizes 'you-know-who' is one's economic doppelganger, then one discovers one can only defeat him by defeating oneself.

ownlee1 said...

"Nash equilibrium"

right on 1:51

another example of our current capitalism & schizophrenia.

"C'est donc en droit qu'il faut comprendre la réduction de la bêtise, de la méchanceté, de la folie à la seule figure de l'erreur."


Anonymous said...

that's dumb. who cut the rates to 0%? who screamed they gonna debase for a year now? so it moved quickly instead of dragging it and few traders got caught. so what? what's bound to happen gonna happen anyway.

Anonymous said...

I don't really believe the rumour. If it was a 60 bio eur/usd transaction then why do other currencies act in a similar way? It more looks like a ZIRP/"normal" rate movement but then again why did it correct so quickly.
Your reaction on China's supposed transaction surprises me somewhat. After all its their money and they can do with it what they want. My concept of freedom is based on consequentialism.

Macro Man said...

Anon @ 1.51, I think we are pretty far from a Nash equilibrium- quite the contrary, actually. This situation is one where all parties could be improved with appropriate action.

My beef with China is not the direction/level of the euro (I've had no real position in FX), but a) their abuse of market liquidity, and b) the fact that they are free-riding on he global financial system, with deleterious consequences.

They are more than happy to wreak havoc in G10 currencies.....but no one is allowed to play with theirs.

They are more than happy to artificially cheapen the price of credit through the recycling of their reserves (eg, the old bond conundrum)...but try investing in their markets. You can't, by and large.

The damage caused by the artificial cheapening of credit is by now fairly obvious to all. While China is clearly not solely responsible for the subprime/structured credit/financial leverage fiasco, they do bear a significant portion of the responsibility by not allowing the risk free rate to reach its equilibrium level in 2003-2007.

The West wants to fight under the auspices of Marquis de Queensberry rules...but China is breaking out the kung fu.

All I ask from Western policymakers is that they at least get one of these mixed martial arts geezers to do their fighting, rather than a washed-up boxer....

Charles said...

Macro Man
thanks, I always thought reading all those dirty newspapers that we americans are responsible for this stoopid subprime credit crunch, it certainly makes my day to finally know the truth that the chinks are behind all our evils, I will suggest we petition VP Cheny we nuke the bastards, the human rights people would surely support us, what u say Man?

Macro Man said...

Hey Chuck, the concept of "more than one moving part" may be a bit tricky for that brain of yours to understand. And hey, since you're American (and therefore, statistically unlikely to hold a passport), you may not understand that there are other people in the world as well who can impact your life. So I'll try and make it easy for you.

Step 1: Americans spend waaaayyyyy too much and think waaaayyy too little about the consequences.

Step 2: China takes the piss with their currency, accumulates a farcical amount of FX reserves, and plows most of them into bond markets, thereby reducing the cost of money for everyone to unrealistic levels, from government on down.

Step 3: Everything blows up.

When the cops make a drug bust, they generally arrest both the smackhead and the pusher.